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Voluntary Matching Grants can Forestall Social Dumping

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Author Info
Jacques Drèze
Charles Figuières
Jean Hindriks

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Abstract

The European economic integration leads to increasing mobility of factors, thereby threatening the stability of social transfer programs. This paper investigates the possibility to achieve by means of voluntary matching grants both the optimal allocation of factors and the optimal level of redistribution in the presence of factor mobility. We use a fiscal competition model a la Wildasin (1991) in which states differ in their technologies and preferences for redistribution. We first investigate a simple process in which the regulatory authority progressively raises the matching grants to the district choosing the lowest transfer and all districts respond optimally to the resulting change in transfers all around. This process is shown to increase total production and the level of reditribution. However it does not guarantee that all districts gain, nor that an efficient level of redistribution is attained. Assuming complete information among districts, we first derive the willingness of each district to match the contribution of other districts and we show that the aggregate willingness to pay for matching rates converges to zero when both the efficient level of redistribution and the efficient allocation of factors are achieved. We then describe the ajustment process for the matching rates that will lead districts to the efficient outcome and guarantee that everyone will gain.

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Paper provided by LAMETA, Universtiy of Montpellier in its series Working Papers with number 06-13.

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Length: 19 pages
Date of creation: Nov 2006
Date of revision: Nov 2006
Handle: RePEc:lam:wpaper:06-13

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  2. Guttman, Joel M, 1978. "Understanding Collective Action: Matching Behavior," American Economic Review, American Economic Association, vol. 68(2), pages 251-55, May. [Downloadable!] (restricted)
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  5. Wildasin, David E., 1988. "Nash equilibria in models of fiscal competition," Journal of Public Economics, Elsevier, vol. 35(2), pages 229-240, March. [Downloadable!] (restricted)
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  6. David E. Wildasin, 2000. "Factor mobility and fiscal policy in the EU: policy issues and analytical approaches," Economic Policy, CEPR, CES, MSH, vol. 15(31), pages 337-378, October. [Downloadable!] (restricted)
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  7. Kevin Roberts, 1999. "Dynamic Voting in Clubs," STICERD - Theoretical Economics Paper Series 367, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE. [Downloadable!]
  8. Charles Figuieres & Jean Hindriks & Gareth Myles, 2004. "Revenue Sharing versus Expenditure Sharing in a Federal System," Asia-Pacific Financial Markets, Springer, vol. 11(2), pages 155-174, March. [Downloadable!] (restricted)
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  9. Wildasin, David E, 1991. "Income Redistribution in a Common Labor Market," American Economic Review, American Economic Association, vol. 81(4), pages 757-74, September. [Downloadable!] (restricted)
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  13. Figuieres, Charles & Hindriks, Jean, 2002. "Matching grants and Ricardian equivalence," Journal of Urban Economics, Elsevier, vol. 52(1), pages 177-191, July. [Downloadable!] (restricted)
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  14. Roberts, John, 1979. "Incentives in Planning Procedures for the Provision of Public Goods," Review of Economic Studies, Blackwell Publishing, vol. 46(2), pages 283-92, April. [Downloadable!] (restricted)
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